ServiceNow (NOW +0.60%) and Snowflake (SNOW +1.07%) are both high-growth cloud stocks that have stumbled as rising inflation and higher interest rates drove investors toward more conservative investments.
Over the past two months, ServiceNow's stock price declined nearly 20%, while Snowflake's stock price slumped more than 30%. Should investors consider buying either cloud stock right now?
The differences between ServiceNow and Snowflake
ServiceNow and Snowflake both break down silos and simplify tasks for large companies with their cloud-based subscription services.
Image source: Getty Images.
ServiceNow provides cloud-based services that streamline digital workflows for IT professionals, employees, creators, and customers. It enables users to manage their own projects, teams, and customer interactions with a wide range of plug-ins and apps.
Snowflake's cloud-based data warehousing platform pulls all of an organization's data from a wide range of computing platforms, then centralizes those results for a wide range of third-party data visualization services.
How fast is ServiceNow growing?
ServiceNow's revenue rose 31% to $4.52 billion in fiscal 2020 (which aligns with the calendar year) then grew 30% to $5.9 billion in fiscal 2021.
It ended 2021 with more than 7,400 customers, including approximately 80% of the Fortune 500. Within that total, 1,359 customers had signed annual contracts worth more than $1 million, which represented 25% growth from a year earlier. It also ended the year with an impressive renewal rate of 99%.
ServiceNow's remaining performance obligations (RPO), which reflect its forward demand by adding its deferred revenue to its backlog, rose 32% for the full year. It expects its subscription revenue to rise 28% on a constant currency basis in 2022, while analysts expect its total revenue to grow 25% in 2022 and increase another 24% in 2023.
ServiceNow believes it can eventually generate at least $15 billion in annual revenue by 2026 -- which would represent a compound annual growth rate (CAGR) of more than 20% from 2021 to 2026 -- as large companies continue to digitally streamline their operations.
How fast is Snowflake growing?
Snowflake's revenue grew 124% to $592 million in fiscal 2021 (which ended Jan. 31, 2021). In the first nine months of fiscal 2022, its revenue rose 108% year over year to $836 million. It ended the third quarter with 5,416 customers, a 52% jump from a year earlier, with a net revenue retention rate of 173%, which improved from 162% a year ago.
Snowflake's growth has been explosive, but it's gradually cooling off. Analysts expect its revenue to grow 104% in fiscal 2022, rise 66% in fiscal 2023, and increase by another 56% in fiscal 2024.
Nonetheless, Snowflake still believes it will grow its annual product revenue (which accounts for over 90% of its top line) from $554 million in fiscal 2021 to $10 billion in fiscal 2029 -- which would represent a stunning CAGR of 43.6%. It believes it can hit that target by securing 1,400 customers with over $1 million in annual product revenue by the final year, which would be a near-tenfold expansion of its current customer base.
Which company is more profitable?
ServiceNow is profitable by both generally accepted accounting principles (GAAP) and non-GAAP (adjusted) measures. Snowflake isn't profitable by either metric.
ServiceNow's GAAP net income rose 93% to $230 million in fiscal 2021, and analysts expect its profit to rise 43% in 2022 and 55% in 2023. Those robust growth rates, along with a healthy subscription gross margin that remains above 80%, indicate ServiceNow's growth is sustainable.
Meanwhile, Snowflake's GAAP net loss widened from $349 million in fiscal 2020 to $539 million in fiscal 2021, then widened again to $548 million in the first nine months of fiscal 2022. Analysts anticipate a full-year net loss of $728 million, followed by a narrower loss of $676 million in fiscal 2023 and a wider loss of $804 million in fiscal 2024.
On the bright side, Snowflake expects its adjusted gross margin to gradually expand from 69% in fiscal 2021 to 75% in fiscal 2029, which suggests it still has significant pricing power in its niche market.
We should take all those long-term forecasts with a grain of salt, but ServiceNow's stable profits could make it a much more appealing play than Snowflake as rising interest rates curb the market's appetite for unprofitable growth stocks.
Which stock is more reasonably valued?
ServiceNow trades at 67 times forward earnings and 14 times this year's sales. Snowflake, which can't be valued by its earnings yet, trades at 37 times its fiscal 2023 sales estimate.
Neither stock is cheap, but ServiceNow's valuations look more reasonable relative to its long-term revenue growth. Snowflake's investors might argue that its high price-to-sales ratio is also justified by its fiscal 2029 targets, but it hasn't proved that it can achieve that goal while generating stable profits.
Therefore, ServiceNow is a much safer investment than Snowflake for four simple reasons: its growth is more stable, it generates higher gross margins, it's firmly profitable, and its stock is significantly cheaper.
